SunEdison Inc (OTC:SUNEQ) has been one of the most battered stocks on the market this year despite being a darling of hedge funds since 2012. The downturn was brought on by quarter after quarter of losses and a deteriorating financing environment.
On the company's recent earnings call with analysts, management explained some of the company's challenges and their plans for the future. Here were the five biggest takeaways from that call.
1. The plan has changed
"We are shifting our portfolio approach from one that dropped nearly all projects to yieldcos and maximized long-term value creation to one that is flexible with a more balanced sales distribution to warehouses and third-party sales. This will allow us to generate near-term cash, while still providing optionality on assets sold to warehouses as TerraForm holds a call-right to buy the assets from the warehouse at a future date at their discretion." -- Ahmad Chatila, CEO
The warehouse vehicles Chatila referred to are meant to be funds that will hold projects until the yieldcos can buy them. But at this point it's unclear if that will ever happen.
2. Operating costs are coming down
"We are fully leveraging the synergies and new economies of scale we have from our recent acquisitions to accelerate our OpEx cost roadmap by two years to $0.17 per watt by the second quarter of 2016. With these changes, we will generate cash at the development company level and we expect to demonstrate progress through the next two quarters to three quarters." -- Ahmad Chatila, CEO
Prior to the dislocation currently taking place in renewable financing, SunEdison had planned to expand operations into energy storage, residential solar, and multiple countries internationally. But in an effort to reign in costs it has cut down on expansion plans and will focus on projects that can provide cash flow now.
The projected operating expense of $0.17 per watt becomes important because SunEdison will make money if it can sell projects for a higher margin than that and still have enough left over to pay financing costs. Whether it can do that or not is unknown, but the plan is to cut operating expenses to the bone to try and get there.
3. Yieldcos will com back... someday
"One, we are cautiously optimistic that the current dislocation will normalize; and two, the yield of renewable energy yield curves could be lower than MLPs, due to contracted life, no fuel risk, and higher growth rate." -- Brian Wuebbels, CFO
Wuebbels spent a lot of time comparing yieldcos to MLPs, and in some ways that's a fair comparison -- they're businesses that are built to generate cash flow in the energy industry. MLPs have also gone through periods of dislocation, where yields got extremely high only to normalize long-term.
The hope for SunEdison is that this is a temporary dislocation in the yieldco structure. It it's not, the company could be in real trouble.
4. Money to burn
"We have sufficient liquidity at the DevCo with approximately $1.4 billion [in cash] as of the end of the quarter. On a forward-looking basis, it should be noted that we would anticipate drawing down a portion of this cash in the upcoming quarters for some one-time activities, including the First Wind earn-out payment, additional business optimization, and the cash consideration piece of the Vivint deal." -- Brian Wuebbels, CFO
One of the concerns for investors in SunEdison is that the company will simply run out of cash. With the Vivint deal to pay for 2.9 GW of projects under construction, it's a concern that's well founded, with equity markets all but unavailable as a funding source.
While management exudes confidence in its cash plans, this is probably the biggest concern for the market at the moment.
5. Rosy projections
"And we continue on our trajectory, as we've described in our business update, to deliver $0.35 a watt of gross margin in 2016 and, as you'll note, the $0.17 of OpEx next year, creating a positive cash flow business." -- Brian Wuebbels, CFO
The numbers SunEdison has provided imply that it will earn an operating margin of $0.18 per watt, and based on the guidance midpoint of 3.5 GW for 2016 the company could generate $630 million in operating margin. That's great, except interest expense was $214 million in the third quarter, and on an annualized basis that would cost $856 million.
Some of the debt is consolidated from yieldcos, but the point is that SunEdison is on a razor thin edge, and it has to execute flawlessly just to survive. No telling if it will be able to do that with the upheaval we've seen over the past year.